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WASHINGTON (Reuters) - So many workers have left the job market in recent years that the decline in the official unemployment rate to 7.4 percent last month may understate the extent of weakness in employment prospects.

Combined with low inflation, a more aggressive Fed might actually see depressed rates of participation in the job market as an impetus for further monetary easing, particularly if they think more working-age Americans have simply given up looking for work after repeated rejections.

For now, officials seem gun-shy about further purchases of U.S. Treasuries and other assets, a practice designed to stimulate the economy by driving down long-term interest rates, and appear inclined to decrease them later this year.

A sharp retreat in U.S. labor force participation coincided with the start of the global financial crisis in mid-2007 and accelerated a downward trend that was already in place, for reasons economists do not yet fully understand.

The participation rate, which measures the ratio between people in paid work and the working-age population as a whole, peaked in 2000 above 67 percent and then fell steadily over the following decade. The financial crisis accelerated the decline.

The rate fell again last month, to 63.4 percent from 63.5 percent in June, as the jobless rate fell to 7.4 percent from 7.6 percent. Economists say the fall in the participation rate explains a sizeable part of the reduction in unemployment, which would otherwise be higher. Some say much higher.

Last Friday the BLS reported that the national unemployment rate declined by two-tenths of a percentage point in July vs. June. On the surface, that would seem to be good news for the labor market, right? Not according to the knee-jerk analysis by a lot of jerks on cable financial news. You see, to these jerks, if the unemployment rate declines at the same time that the labor force and/or the participation rate declines, the decline in the unemployment rate probably is the result of people exiting the labor force because they have given up hope of finding gainful employment. Sometimes the jerks are correct. Of late, however, they have been wrong.

Not everyone that drops out of the labor force has given up hope of finding a job. People exit the labor force for a variety of other reasons. Some people actually retire voluntarily. Following the birth of a child, some dads (or on occasion, even some moms) choose to exit the labor force in order to nurture the newborn. Some people become disabled.

In the Household Survey, from which the unemployment rate is calculated, those respondents who say they are out of the labor market are asked if they currently want a job. Chart 1 shows the year-over-year change in both the total number of the civilian noninstitutional population not in the labor force and the number of these who indicate that they do want a job. In July 2013, the number of people of the noninstitutional population who were not in the labor force had increased by 1,732 thousand. At the same time, of this 1,732 increase in people not in the labor force, there was an increase of only 25 thousand people (nearly invisible in the chart) who wanted a job. So, in the past 12 months, only 1.4% of the increase in people not in the labor force indicated that they wanted a job. In other words, the bulk of people dropping out of the labor force in the past 12 months did not drop out in despair over poor job prospects.

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Fictional Character Quote of the Day:

I guess it comes down to a simple choice. Get busy living or get busy dying.

- Andy Dufresne

"The Shawshank Redemption"

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